SAN JUAN, P.R. — Four months after announcing a grueling five-year plan for reducing the island’s vast debt and reviving economic growth, Puerto Rico’s top economic officials said on Monday that they had been too optimistic and revised the plan for the worse.

When the government first released its five-year plan last September, it warned creditors that it would need $14 billion of debt relief over that period, because it did not have enough money to pay them the total amount due, $28 billion.

In a briefing for journalists on Monday, officials said they now expected to need a $16 billion break from creditors.

The officials said they had run updated forecasts for 10 years as well, and things did not get much better. Over the full 10 years, they said, they would need $24 billion worth of reductions in the total $63 billion in principal and interest that various branches of government owed creditors.

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With inadequate revenue and no ability to borrow, Puerto Rico’s cash has been drying up. The island was able to make a number of large, high-priority debt payments due on Jan. 1 only by taking money away from lower-ranking creditors. The island’s next significant debt payment, of $400 million, is due in May from the Government Development Bank.

The development bank is important because it orchestrates most of Puerto Rico’s complex web of debt, and because it has the increasingly difficult job of making sure all branches of government have adequate cash. There are concerns that if it ran into severe problems, they would spread to other parts of the government.

And on July 1, so many debt payments are due that the officials said that without relief, there would be defaults from the top to the bottom of the hierarchy of creditors. When questioned further, they said it was still too soon to reveal how much relief they would seek from each creditor group.
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Mr. Lew and other Obama administration officials have been urging Congress to enact measures they say would help it restructure its $72 billion of debt in an orderly manner. In particular, the administration has argued that Puerto Rico needs access to a legal framework, like bankruptcy, that would automatically stay creditor lawsuits and make it possible to force dissident creditors to accept settlements. As currently written, the bankruptcy code bars Puerto Rico’s cities or other bodies of government from using Chapter 9, the provision that insolvent cities and counties on the mainland have been able to use to shed debt.

The island has even less money than everyone thought, according to the latest figures out Monday, and it's having to resort to "extraordinary measures" to pay its bills.
The cash crunch is so bad that Puerto Rico's prison system is no longer paying the vendor that supplies food for inmates, and some special education instructors have stopped getting paid, according to a senior government official. The island is also delaying people's tax refunds.
Over the next decade, Puerto Rico must close a nearly $24 billion funding hole, worse than previously projected in September. That's after raising taxes and severely cutting expenses.
The island's problems center on how to deal with just over $70 billion in total debt.
"A significant restructuring of the Commonwealth's debt is inevitable," the government report concluded.

Granting Puerto Rico what has been referred to as "Super Chapter 9" — lumping all 18 bond issues together under the same terms — could lead to fiscally struggling U.S. states trying to pursue a similar extraordinary restructuring option for their own outstanding debts, said Negroni, who holds bonds issued by Puerto Rico and is the former head of municipal trading at Goldman Sachs.

Read MorePuerto Rico gov: Prepping for legal action
He believes the political move would be dangerous because it could undermine investor confidence in the willingness for bond issuers to pay holders of its debt.

"It creates a lack of confidence, increases spreads, volatility and makes the cost of financing necessary infrastructure across the nearly $4 trillion marketplace much higher and less certain," Negroni said.

Negroni also said that various creditor groups are "ready and anxious" to start talks with the commonwealth about restructuring the approximately $70 billion in outstanding debt, but that thus far senior officials have "frankly not been very earnest in their availability and their willingness to connect" with the bondholders.

Lew is scheduled to meet on Wednesday [today] with officials and community leaders to talk about the proposal that President Barack Obama's administration presented Congress to create a territorial bankruptcy regime that would allow Puerto Rico's government to restructure its debt and impose new oversight on finances and expand Medicaid benefits, among other things.

Puerto Rico does not have access to any local or federal bankruptcy laws. Meanwhile, the U.S. Supreme Court recently announced it would hear an appeal on a ruling that barred Puerto Rico from giving municipalities the power to declare bankruptcy.

Ryan spokeswoman AshLee Strong said the speaker has ordered the House committees of jurisdiction to work with the Puerto Rican government, review options, and report back by the end of the first quarter. Ryan has pledged the House will come up this year with "a responsible solution" for Puerto Rico's debt problems. Meanwhile, Garcia praised Lew's letter.

"We thank Secretary Lew for reminding Congressional leaders that they can still prevent this humanitarian crisis from spinning out of control," he said.

Republican leaders including Sen. Orrin Hatch, R-Utah, have demanded to see audited financial statements from Puerto Rico, but they have not materialized. Jesus Manuel Ortiz, public affairs secretary for the Puerto Rican government, said Friday that the statements are nearly ready and would be produced soon, although he didn't specify a date.

Puerto Rico is struggling with an increasingly dwindling cash flow that has threatened to cut off gasoline and electricity to certain public and private institutions. Almost 10 percent of Puerto Rico's population has left since 2006 and hundreds of businesses have closed, with Walmart announcing Friday that it would shutter seven supermarkets on the island as part of a global restructuring.

Facing $70 billion in debt and a 45% poverty rate, Puerto Rico’s leaders are expected to meet with creditors soon in an effort to negotiate a debt restructuring deal. But experts caution that there is no quick fix to getting the island Commonwealth back on solid footing and allowing it to emerge from the crisis on a more sustainable path.

The root of the island’s crisis, points out Jose Villamil economist at Estudios Tecnicos, a San Juan consultancy, is that both the population and the economy of Puerto Rico have become smaller, and are projected to continue to contract. The island’s population dropped from 3.8 million in 2000, to 3.64 million in 2012 to 3.548 million in 2014, Villamil says. “By 2030 the population is now estimated to be around 2.8 million, way below … the 2000 projection of close to 4.0 million by 2020.” He adds, “There is not a general awareness of what 10 years of economic contraction means” for the Commonwealth and its population.

More than 250,000 jobs have been lost since 2006; manufacturing employment has dropped to 74,000 from a peak of 165,000 in 1996; Investment in construction is down from a high of $6.6 billion in 2004 to $4.3 billion in 2015; home foreclosures reached a record high 4,000 in 2015. “What has happened in the economy over the past five decades is a collapse of the capacity to generate growth,” Villamil notes. “The recent experience beginning in 2006 is clearly not a recession, but rather the culmination of a long process of weak economic performance.”

According to Villamil, Puerto Rico’s economic malaise refers mostly to production, since consumption has held up fairly well over the years. There are several reasons for that: the federal transfer payments that make up more than 20% of the island’s personal income, government employment, though reduced recently, remains above 20% of total employment, and a very large informal economy that is estimated to be about 28% the size of the formal economy. “These three factors sustain consumption and isolate part of the population from economic volatility but, on the other hand, do little to stimulate investment and production since consumption is mostly imported,” Villamil says.
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Puerto Rico will be unable to muddle through without restructuring its debt, according to University of Pennsylvania law professor David Arthur Skeel. “The Commonwealth is probably going to have to restructure its debt, in addition to whatever else is done to help it out. Puerto Rico’s governor and congressional representative have been pushing for access to bankruptcy, at least for its municipalities, maybe for Puerto Rico itself.”

But Puerto Rico doesn’t have either option now because the island’s municipalities were excluded from Chapter 9, the municipal provisions of the bankruptcy laws, in 1984. “There has been discussion about some sort of federal funding — some kind of bailout,” Skeel adds. “There’s also been discussion about other legislative changes such as relaxing the minimum wage requirement, which many economists on both sides of the aisle think is too high for Puerto Rico.”
In Skeel’s view, “the most plausible — almost the only plausible — strategy starts with some kind of control board to oversee Puerto Rico’s finances, as was done with New York City back in the 1970s. It’s been done with Washington, D.C. and other cities since then. In addition, I think Congress needs to give Puerto Rico’s municipalities, at least — and probably Puerto Rico itself — access to bankruptcy.” Skeel notes that “if bankruptcy isn’t made available, it’s going to be a mess. It’s already turning into a mess now. Several bond funds have sued because of defaults, so there’s already litigation against Puerto Rico. There’s really no clear process for deciding who gets what if there’s no bankruptcy option.”

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For its part, CNE, a San Juan-based think tank, argues in a recent report that “Puerto Rico’s most urgent need at this moment is a legal framework to restructure its debt in a fair and orderly manner under the supervision of a federal bankruptcy court. The next few days provide a small window of opportunity for a constructive resolution. It would be catastrophic for Congress not to take full advantage. Though we face a dire state of affairs, we believe we are also before the best opportunity San Juan and Washington have had in almost a century to craft a political and economic arrangement equal to that centenary challenge.”

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Would Repealing the Jones Act Help?

In search of a quicker fix, some lawmakers from Puerto Rico have joined forces with their counterparts from Hawaii, Alaska and Guam to pressure the U.S. Congress for relief from the Jones Act, a maritime cabotage law passed in the 1920s. Designed to protect domestic shipping industry, the Jones Act states that only those ships made in the U.S. and flying the country’s flags can deliver goods between U.S. ports. That means that a cargo ship filled with goods from China can only make one stop in the U.S. at a time. It cannot stop in Hawaii to exchange goods before heading to Los Angeles. [Cabotage is defined as the transportation of goods or passengers between two places in the same country by a transport operator from another country.]

Critics say that the Jones Act punishes the people of Alaska, Puerto Rico, Guam and Hawaii with high costs of living. “All of our areas are specifically impacted by the Jones Act,” Hawaii state Sen. Sam Slom said at a conference last November. “It is now known that the Hawaiian cost of living, primarily because of our additional shipping cost and because of the Jones Act, is now 49% higher than the U.S. mainland. And this is becoming unbearable. It’s difficult for individuals. It’s difficult for families. It’s difficult for small businesses as well.”

But while Villamil thinks the law needs to be amended, he suggests that eliminating it wouldn’t make a difference in Puerto Rico’s economy. According to a 2013 study conducted by Villamil’s firm, “should international shippers enter [U.S.] domestic trade,” as a result of the repeal of the Jones Act, “they would be subject to federal regulations, which would erase much of the advantage in costs” that they currently enjoy. “Comparisons between Jones Act costs and international costs have overlooked this factor…. The four Jones Act carriers have invested in port infrastructure, which international lines do not. Replacement value of these investments has been estimated at $250 million.”

WASHINGTON — If it’s up to the Treasury Department, public employees in Puerto Rico who were promised pensions could be better off than investors who bought the island’s bonds.

A broad plan being put forward by the Treasury Department to ease Puerto Rico’s financial crisis would put pension payments to retirees ahead of payments to bondholders — a move that some experts fear could rattle the larger municipal bond market.

The proposal was being driven by evidence that Puerto Rico’s pension system is nearly out of money, leaving retirees who are dependent on it financially vulnerable.

“The major problem is, the entire pension system is close to being depleted,” said Antonio Weiss, counselor to Jacob J. Lew, the Treasury secretary. “But 330,000 people depend on it. It’s unfunded, and they have to be protected.”

Shielding retirees from pension cuts, the thinking goes, would not only protect thousands of older residents on the island, but it might also encourage younger retirees to stay there, rather than move to the United States mainland in search of new jobs and incomes.

And by unfunded, they mean really really unfunded. The last time I looked, it was 7% funded... not sure why they hold any assets at all, given it's pay-as-it-goes.

Quote:

“Most Puerto Rican debt is held by individuals,” said Thomas Moers Mayer, a lawyer representing two large mutual fund companies, Franklin Advisers and OppenheimerFunds, which together own about $10 billion in Puerto Rican debt securities. “They are mostly over 65, and they mostly have incomes of less than $100,000 a year. They are not vulture funds. They are your friends and neighbors.”

Battle of the old folks.

Quote:

The part of the proposal that gives priority to pensioners has received little attention. Currently, Puerto Rico’s laws and Constitution give top priority to general-obligation bonds — the type backed by the government’s “good faith, credit and taxing power.”

Puerto Rico is not unique in this respect; for decades, the general-obligation bonds of all the states have been marketed as virtually default-proof, safe enough for widows and orphans. The concept was developed after the Civil War, as a way to rebuild investor trust after a number of notorious bond defaults.

Other bonds carry with them varying degrees of legal repayment security. Puerto Rico’s debt is extraordinarily complex, but in general, its bonds can be ranked in a hierarchy of eight levels, with general-obligation bonds at the top. The ranking is described in an analysis of the debt by the Center for a New Economy, a nonpartisan research group in San Juan.

Public workers’ pensions, the center found, fall on a second hierarchy altogether, which sets priorities for the government’s operational disbursements. Here again, however, payments due on general-obligation bonds come first, followed by payments due on legally binding contracts. Outlays for pensions come third.

That means that under existing law in Puerto Rico, if there is not enough money to pay both general-obligation bonds and public retirees’ pensions, the money would go to bondholders.

But the Treasury’s proposed restructuring framework would change that. It would require that the restructuring plan “not unduly impair the claims of any class of pensioners.”
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Puerto Rico has already defaulted on some of its bonds. More payments are due in May and June. Bonds are now nearly impossible to sell, and members of Congress, especially Democrats, as well as financial experts say the island’s troubles will become increasingly enormous if some kind of restructuring framework is not approved soon.

Feb 25 The U.S. Treasury envisioned giving Puerto Rico's pensioners stronger legal protection than holders of its constitutionally backed bonds if it went bankrupt, according to a draft of a proposed plan obtained by Reuters.

The draft, circulated in Washington late last year but not made public in the run-up to President Barack Obama's Omnibus budget, imagined a broad structure aimed at protecting citizens while providing flexibility to cut debt, an approach consistent with what Puerto Rico's leaders have sought.

One source familiar with the document and a second Congressional source said Treasury was involved in crafting it with senators from both parties, although it was unclear who wrote it.

"We would not want to put at risk the payments that are due to pensioners," Treasury Counselor Antonio Weiss said during a hearing on Puerto Rico on Thursday in front of the House Natural Resources Committee, when asked whether there should be any "sacred cows" exempt from a restructuring in Puerto Rico.

However, Weiss said it had been "incorrectly reported" that a Treasury plan would have given preference to public pensions, without elaborating.

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Puerto Rico's biggest pensions face a combined funding shortfall of roughly $43.5 billion, or 96 percent, and are projected to run out of assets by about 2019.

The language of Treasury's draft "gives a debtor latitude to give better treatment to pensions than to GOs," something that would make it "far more controversial" to creditors, Melissa Jacoby, a bankruptcy expert and professor at UNC-Chapel Hill, told Reuters.

Weiss on Thursday called Puerto Rico's pension shortfall "unheard of." It is the largest deficit of any U.S. public pension since at least 2000, according to publicplansdata.org.

Yet pension debt is not included in Puerto Rico's oft-cited $70 billion debt load, despite the fact that the payments will become the Puerto Rico government's responsibility when the pensions run out of assets around 2019. (Reporting by Nick Brown; Editing by Kim Coghill and Meredith Mazzilli)

A suggestion from a U.S. Treasury official to protect Puerto Rico’s pension payments while also seeking cuts from all bondholders may be viewed as the latest sign that politicians favor retirees over investors in cases of municipal distress.
Treasury Counselor Antonio Weiss said in prepared testimony Thursday that a failure to ensure payments from Puerto Rico’s pension system, which has more than 330,000 beneficiaries and is underfunded by $44 billion, would harm the commonwealth’s residents and damage its economy. Meanwhile, “all creditors must be at the table” to restructure the island’s liabilities to an affordable level, he said.
It could “set a dangerous precedent,” said Peter Hayes, head of munis at BlackRock Inc., which oversees $110 billion of the debt. “Pensions are clearly down the capital structure in terms of hierarchy and repayment. So the political side of it is boosting them higher than bondholders.”
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Congress is considering whether to inject the federal government into a more central role in a crisis that’s escalated since Governor Alejandro Garcia Padilla in June said the government can’t afford to pay its debt. Puerto Rico has already defaulted on some securities and has warned that it may halt payments as soon as May without a solution. House Speaker Paul Ryan directed Republican committee chiefs to come up with a plan by the end of March.

Double Tax-Free Income Fund has 49% of assets in island debt
Merger would fold Puerto Rico securities into larger fund

Puerto Rico’s debt exchange isn’t the only security swap for investors burned by the island’s financial collapse.
Franklin Resources Inc. plans to close the $147 million Double Tax-Free Income Fund, whose strategy of plowing more of its assets into Puerto Rico than any other municipal-bond fund turned it into one of the worst performers. After the fund shriveled when investors pulled out money, Franklin is asking those remaining to exchange their shares for a piece of the $8.3 billion High Yield Tax-Free Income Fund, which has far less exposure to the island.
“It parallels the life cycle of Puerto Rico in the debt markets,” said Matt Fabian, a partner at Municipal Market Analytics, a research firm based in Concord, Massachusetts. “As the island becomes increasingly insolvent, investing strategies dependent on the island also become insolvent.”
U.S. mutual funds for years were eager buyers of the Caribbean territory’s debt, which is tax-exempt everywhere in the nation and provided high yields in a municipal market that’s known as a haven. With Puerto Rico pushed to the brink, that investment tactic has turned toxic: The five worst-performing open-ended municipal funds in the past year, including Franklin’s, all had at least 10 percent of their assets in the island’s securities, according to Bloomberg and Morningstar Inc. data.
Puerto Rico, which racked up $70 billion of debt by routinely borrowing to paper over budget shortfalls, has already skipped interest payments on some securities and may default on general-obligation bonds for the first time by July. Governor Alejandro Garcia Padilla is seeking to cut what the commonwealth owes by about 46 percent by asking investors to exchange their bonds for new securities. If they decline, his administration has said it may suspend interest and principal payments altogether.

You Can Lead a Horse to Water, But You Can’t Call it an Airplane: Supreme Court Oral Arguments Suggest Puerto Rico’s Recovery Act May Recover

Thursday, March 24, 2016
A few thoughts on Tuesday’s oral arguments before the U.S. Supreme Court in the litigation over whether Puerto Rico’s Public Corporations Debt Enforcement and Recovery Act, an insolvency statute for certain of its government instrumentalities, is void, as the lower federal courts held, under Section 903 of the U.S. Bankruptcy Code:

Due to Justice Scalia’s death and Justice Alito’s recusal, only 7 Justices heard the case and only 4 votes are needed for a majority. Almost all of the questioning at oral argument came from Justices Sotomayor, Kagan and Breyer, plus a couple noteworthy questions from Justice Ginsburg. With the standard disclaimer that questions at oral argument are not necessarily predictive of a Justice’s votes, it seems clear from the questioning that Justice Sotomayor will vote to reinstate the Recovery Act and is the most passionate of the Justices about the issue, and, even if the relatively silent Chief Justice Roberts and the silent Justice Kennedy and Justice Thomas vote to affirm, the questions and musings of Justices Kagan, Breyer and Ginsburg suggest that Justice Sotomayor could sway them to her position and thereby obtain the 4 votes necessary for reversal of the First Circuit’s holding and reinstatement of the legislation.

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The First Circuit was persuaded that it would make no sense for Congress to act affirmatively to withhold from Puerto Rico the right to authorize its insolvent instrumentalities to file for bankruptcy under Chapter 9, while intending that Puerto Rico have the right to authorize such filings under some insolvency statute of its own creation. That seems almost unassailably correct; basic common sense suggests that whatever distrust of Puerto Rico must have motivated Congress to close the door to Puerto Rico’s ability to authorize its instrumentalities to file under Chapter 9 cannot be reconciled with Congressional intent that Puerto Rico be allowed to authorize such filings under its own version of an insolvency statute that might be identical to, or differ in unpredictable ways from, Chapter 9.
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Puerto Rico’s persistence in seeking reinstatement of the Recovery Act reflects a calculus that an insolvency process that produces a legally questionable and potentially unenforceable result is better than no process, and provides creditors more incentive for consensual resolutions than no process. Chapter 9 eligibility for Puerto Rico’s instrumentalities, and, if Congress were to grant it, “super Chapter 9“ eligibility for Puerto Rico itself, would clearly, in Puerto Rico’s view, constitute a far more advantageous and conclusive process. However, there is some risk to Puerto Rico that if the Supreme Court reinstates the Recovery Act before Congress acts on federal legislation to address Puerto Rico’s financial woes, the revival of the Recovery Act would undercut any Chapter 9 momentum, leaving Puerto Rico with its legally wobbly Recovery Act. But Puerto Rico appears willing to gamble that the Supreme Court will issue its decision after Congress has done whatever it will do, and, in any event, to believe that a constitutionally vulnerable local bankruptcy statute in the hand is worth a constitutionally bulletproof federal bankruptcy statute in the bush. - See more at: http://www.natlawreview.com/article/....EXcMLIFx.dpuf

Before Tuesday, I’d have said that Puerto Rico had no chance to win its legal fight to let its municipalities and utilities declare bankruptcy. That's how the island hopes to resolve its overwhelming debt problems, but the federal bankruptcy code says that it can't.

That's what the U.S. Court of Appeals for the First Circuit held last summer, unanimously. The statute seemed so clear that even Judge Juan Torruella, the appellate court’s only Puerto Rican member, concurred in an outraged separate opinion criticizing the federal law.

Then Sonia Sotomayor stepped in. Oral arguments before the Supreme Court rarely change the outcome of a case, yet Tuesday's session may turn out to be the exception. In a fascinating and unusual argument, Justice Sotomayor, who is herself of Puerto Rican descent, spoke by my count an astonishing 45 times. Sotomayor left no doubt that she was speaking as an advocate.

The interpretation of the law she favored would make the system fairer to Puerto Rico, allowing the commonwealth to create its own emergency bankruptcy measures outside federal law. But it depends on a highly doubtful reading of the statute, one that stretches credulity when read into the text. Ideally, Congress will hear what happened at the oral argument and pass one of the reform proposals it’s currently considering that would spare the court from having to decide the case.

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Technically, not all of the Constitution applies to Puerto Rico, and Landau declined to say that Puerto Rico would be barred from a default that abrogated the utility’s contractual obligations in its debt contracts. In practice, however, there’s little doubt that the contracts clause of the Constitution would indeed apply to Puerto Rico. Ginsburg knows that perfectly well.

That’s important. She almost certainly asked her question to signal that allowing Puerto Rico to engage in some sort of emergency default wouldn’t actually sink the creditors’ real-world claims. This is as close as Ginsburg gets to hinting that she might be prepared to hold for the commonwealth.

The silent participant in this entire unusual argument is Congress, which is considering legislation that would give Puerto Rico some way to restructure its utilities’ debts. The liberal justices are telling Congress that if it doesn’t help Puerto Rico bail itself out, they may do it themselves.